Gensler recusal faulted in CFTC watchdog’s MF Global report

Gensler participated prior to getting advice on decision

Chairman Gary Gensler’s recusal from the U.S. Commodity Futures Trading Commission’s investigation into the collapse of MF Global Holdings Ltd. was unnecessary and wasn’t required by ethics rules, according to the agency’s internal watchdog.

Gensler decided not to participate after the brokerage filed for bankruptcy in October 2011 even after spending days leading up to the collapse monitoring the situation including through personal e-mail, the inspector general said in a report released in Washington today.

Gensler didn’t seek guidance from ethics officials for two days after collapse, during which he discussed the matter in at least two closed meetings with other commissioners, according to CFTC Inspector General A. Roy Lavik.

The decision to recuse himself following the bankruptcy “was not the most desirable course,” Lavik said in the report. “It is the extent of his participation prior to requesting advice that is troubling.”

The inspector general’s report follows the Oct. 31, 2011, bankruptcy of MF Global and an initial shortfall of $1.6 billion in client funds. The CFTC, Federal Bureau of Investigation and other agencies have analyzed events leading to the bankruptcy. No criminal or civil charges have been brought and customers will recover more than 90 percent of the missing funds.

Two Meetings

In the week before MF Global collapsed, Gensler was in contact with MF Global executives as well as with the CME Group Inc., Securities and Exchange Commission and Federal Reserve Bank of New York. Once the firm collapsed, Gensler led a closed emergency meeting to update the agency’s other four commissioners, according to the report. Gensler led a second closed meeting on Nov. 2 to discuss the situation.

“At no point did the chairman, in any closed meeting, e- mail, or otherwise, state that he believed he might be a distraction to the commission’s work,” the report said.

On Nov. 3, Gensler asked for guidance from the commission’s general counsel about whether he should participate in the investigation. He decided the same day as well to recuse himself from the probe despite advice that recusal wasn’t necessary. In a Nov. 8 statement, Gensler said that he didn’t want “my participation to be in any way a distraction in this important matter.”

Corzine Relationship

Jon Corzine, who was MF Global’s chairman and CEO when it collapsed, worked with Gensler at Goldman Sachs Group Inc. and during his term in the U.S. Senate, where Gensler served as an aide.

Steve Adamske, CFTC spokesman, declined to comment on the report.

“The report does not uncover a defensible explanation for Chairman Gensler’s capricious behavior,” Senator Richard Shelby, the Alabama Republican who sought the report, said in an e-mail statement today. “I therefore continue to question whether Chairman Gensler was more concerned with protecting customers’ accounts or protecting himself from accountability.”

During the weekend before the company collapsed, Gensler exclusively used his personal e-mail account to communicate about the company. Gensler used personal e-mail consistently since he arrived at the agency in 2009 to schedule meetings and have conversations about the agency’s official business.

CFTC policy instructs employees not to e-mail or forward sensitive documents to a personal e-mail address or personal device, according to the report. There were 7,005 instances of Gensler using personal e-mail related to MF Global, a tally that includes duplicates and e-mail chains, the report said.

Nothing ‘Corrupt’

“In reviewing hundreds of e-mail messages using the chairman’s personal e-mail address, we found nothing that appeared corrupt, and he has since ceased this practice,” Lavik said in the report.

The report comes as trustees overseeing the bankruptcy process seek to return funds to clients and narrow the initial $1.6 billion shortfall. Customers of the MF Global brokerage will probably receive at least 93 percent of their money, according to a March estimate by James Giddens, the trustee overseeing the company’s liquidation.

Louis J. Freeh, a trustee for the failed holding company, alleged in a lawsuit in April that Corzine, the former head of the company, implemented strategies that caused the company to fail. Corzine, a former governor and senator from New Jersey and once a co-chairman of Goldman Sachs was sued along with senior executives Bradley Abelow and Henri Steenkamp.